Why Obama's Stimulus Failed: A Case Study of Silver Spring, Maryland

Originally Published by Reason

Jim Epstein of Reason emailed us this special report that he wrote, directed, and produced on why the Obama administration's stimulus spending failed to produce any sort of economic recovery, especially in Maryland. The image on the right is a tiny teaser for the 8-minute video, which you can watch in its entirety by clicking the link at the bottom of this page. The text of the video is reproduced here with permission.

High, persistent unemployment and a sluggish economy underscore what all but the most-dedicated supporters of Barack Obama know to be true: The president's 2009 stimulus program was a massively expensive bust.

Understanding why the stimulus failed is an important step in understanding how the government can—and cannot—goose economic recovery. To get a better sense of how and where the stimulus went wrong, Reason.tv focused on Silver Spring, Maryland, a suburb of Washington, D.C., that's home to a large number of government contractors and other recipients of money earmarked for the sorts of "shovel ready" projects that were going to bring the economy back to life.

President Obama's top economic advisor Larry Summers laid out ground rules for how stimulus dollars should be spent: The funds must be "targeted" at resources idled by the recession, the interventions must be "temporary," and they needed to "timely," or injected quickly into the economy.

None of that turned out to be true. "Even if you were to believe that government spending can trigger economic growth," says Veronique de Rugy, Reason columnist and senior research fellow at the Mercatus Center, "the money is never spent in a way that's consistent with the conditions laid out by the Keynesians for it to be efficient."

Reason.tv identified four basic ways in which the stimulus was doomed almost before it was put into operation.

Government Contracts: More of the Same

According to proponents, an effective stimulus program must put idle resources back to work. A particularly bad way to go about this is to give money to big government contractors to do more of what they're already doing.

Yet that's what happened in downtown Silver Spring, where $138 million dollars in stimulus grants and contracts went to 46 organizations. Just three firms took home a majority of the money. These three firms—Synergy Enterprises, Senior Service America, and Social & Scientific Systems—were major government contractors before the stimulus was signed. In fact, these firms received a combined $71 million in stimulus funds. Over that same period, they got $702 million in other government contracts, according to USASpending.gov.

So the stimulus money was like icing on the cake. Take Palladian Partners, a communications firm in Silver Spring that's received $97.5 million dollars in government contracts over the past 12 years. The National Insitutes of Health (NIH), which is Palladian's biggest client, tacked $363,760 stimulus dollars on to an existing contract, and then followed it with two more awards totaling $431,333. Palladian was to spend the money collecting and disseminating information about how the NIH was spending stimulus money.

Palladian was well paid for its work, but with the project 80 percent complete, its main activities have included building a website, and publishing 29 short articles for the site. The stimulus grant went to hire two new employees, neither of whom was unemployed before coming to Palladian. That's no way to jumpstart the economy.

Infrastructure: Money for Nothing

President Obama said the stimulus bill would put nearly 400,000 people back to work rebuilding America. But over the next two-and-a-half years, the U.S. construction industry shed about 900,000 jobs or 14 percent of the building workforce.

In Maryland, the "specialty trades," a subset of the construction industry that handles big infrastructure projects, has lost 8 percent of its total, which amounts to 8,000 jobs. Maryland's Department of Transportation says stimulus money for transit projects has steadily paid the salaries of only about 600 construction workers since the middle of 2009.

Why didn't Maryland's $771 million stimulus dollars for transit infrastructure have a bigger impact on the state's economy?

Partly because Gov. Martin O'Malley cut infrastructure spending more than enough to offset any gains from the stimulus. Maryland’s Transportation Trust Fund generally pays for highway repairs by collecting a special gas tax and other user fees. After the stimulus money was available, Governor O’Malley raided the trust fund by diverting $861 million over the next three years to help balance the state's budget, according to information provided by Maryland's Department of Legislative Services. After you account for the $771 million in stimulus money, state funding for transit infrastructure saw a net decrease of $90 million. That sort of scenario played out in all sorts of ways in all sorts of states: Stimulus dollars were used to cover general expenses rather than to increase overall spending.

The Green Jobs Fiasco

The stimulus bill set aside $500 million for a program to train and recruit people for the new green economy. The program promised to place 80,000 people in so-called green jobs. The grant period is more than half over, and the program has placed only 8,000 people in jobs, according to a report by the Department of Labor's Inspector General.

In downtown Silver Spring, a union-backed organization called the International Transportation Learning Center got $5 million in stimulus dollars partly to recruit thousands of new workers and train them in new "green job" skills. But because transit workers already face low unemployment and low turnover and the new jobs weren't materializing, the group is instead using the entire grant to teach new skills to workers who already have jobs.

"The spirit of the stimulus shouldn't be to get people who already have jobs to get more money to do the same thing, just bigger," says de Rugy. Under stimulus theory, she says, "government spending should be going to places where unemployment is very high, going to people who are poached from unemployment lines."

Weatherizing Homes: Not So Shovel Ready

According to the Keynesian theory that undergirds it, stimulus spending must be spent quickly to be effective. By Barack Obama's own testimony, one of the most "shovel-ready" stimulus programs was supposed to be a $5 billion program to weatherize 590,000 homes around the country.

But the weatherization program started off as a slow-moving, dismal failure. According to a February 2010 report by the Department of Energy's Inspector General, only 8 percent of the weatherization money had been tapped in the program's first year.

In Silver Spring, Gov. O'Malley held a press conference at the home of Sonja and Richard Lowery in June 2009. It was the first home in Maryland to get weatherized with stimulus money. The program was underway. And then it nearly ground to a halt. In the first year, Maryland weatherized only 279 homes, or 4 percent of its goal.

The main holdup was a concession to organized labor that the "prevailing wage" rules apply to programs funded by stimulus dollars. That meant weatherization workers had to earn at least the average wage in their area for the particular work they were hired to do. Before workers could be paid, Maryland (and every other state) spent months conducting surveys to determine average wages and benefits for workers weatherizing homes in every county.

Today Maryland is racing to spend the remainder of its weatherization money before it’s forced to forfeit what’s left in early 2012.

"The main lesson of the stimulus is that creating jobs is a very complex process," says de Rugy, "and certainly it can't be directed by a top down institution that pretty much fails at everything it does."